In my last article, “The Fiscal Cliff Is Closer Than You Think“, I pointed to reliable facts that show that successful US citizens are leaving the USA in record and growing numbers. I also asked you to look at those facts and then do the math.

That’s one of my favorite phrases… “Do the math.”

The reason why I use that phrase so much is because there are so many politicians, pundits, and legacy media types who throw out all kinds of wild statements, hoping that folks won’t stop to consider what it really means and that they won’t actually do the math.

So today, I would like to delve a little more into the math behind what’s happening with this flight of successful Americans.

To begin with, let’s look at the latest IRS Collections Data. This is data published every year by the IRS, about 18 months after the close of the related tax year. The latest such data available is for the 2009 tax year. (The 2010 data is very late coming out this year.)

* The Top 400 data is drawn from a related IRS PDF document.
† The average tax rate for the bottom 50% is drawn from a related IRS spreadsheet.

The first thing that I would like to point out is that, contrary to what the Democrats and the legacy media would have us believe, the rich not only pay taxes, but they pay far more than their share, based on income. The top 1% earned 16.93% of all US personal income in 2009, but they paid 36.73% of all personal income taxes that were actually collected. That’s after all tax breaks, deductions, exclusions, and even any possible cheating. It’s what was collected by the IRS. That’s 2.2 times their share, based on income.

The top 400 taxpayers have it only slightly better. Since there are roughly 400 billionaires in the USA, that’s generally who these people are. They earned 1.31% of all US personal income, but paid 1.9% of all personal income tax collected. That’s about 1.5 times their share, based on income. This also shows that far from being the rule, it is the exception to the rule for billionaires to pay less tax than their secretaries. That’s only the case if the secretary is in the top 5% of income earners, as is almost certainly the case with Warren Buffet’s secretary, based upon her stated tax rate.

So what has all this to do with successful US citizens moving their citizenship offshore? Well, let’s do the math.

We know from the previously mentioned article that Zogby reported that more than 3 million US citizens are leaving the USA every year and that a little more than half of them will never return, either by intent or circumstance. That’s more than 1.5 million expats a year. We also know that very few of those people will be poor. In fact, those who have the greatest motivation to move offshore are those with the most income. It’s the rich who are being demonized for their hard work and success. It’s the rich who are paying the lion’s share of US taxes and who are being told that it’s not enough. And it’s by and large the rich who are leaving.

So what happens if the rich leave?

Consider how many people are leaving every year, and then look at how many taxpayers comprise the top 1% of income earners in the above chart. You don’t even have to do any math to see that with 1.5 million Americans leaving every year, we could conceivably lose all of the 1.38 million taxpayers who comprise the top 1% in only one year. But more realistically, that 1.5 million who are fleeing is likely spread across the top 10% – the 13.8 million taxpayers who earn more than $112,124 per year. But let’s go a step further and assume that an unlikely 10% of those who are leaving are poor. That drops the 1.5 million down to 1.35 million. But even so, it would still only take about 10 years to lose all of the top 10% (13.8 million / 1.35 million).

But it wouldn’t take all of the top 10% leaving to have a devastating effect on our economy. If only half of the top 10% were to leave, the result would be catastrophic. Again, let’s do the math.

From the IRS data above, we know that the top 10% pays 70% of all federal personal income taxes collected in the USA. So losing half of them would mean losing 35% (half of 70%) of our tax base. They say a picture is worth a thousand words, so look at this picture.

If just half of the top 10% of taxpayers who pay 70% of all federal personal income tax were to leave, it would mean that everyone who remained would have to pay more than 50% in additional taxes (35% / (100%-35%) = 53.8% tax increase), just to make up for that lost 6.5 million taxpayers, whom we could easily lose in less than 5 years.

Then consider that, as we learned in the previously mentioned article, the number of expats leaving the USA is not remaining stable but is increasing at a phenomenal rate. In other words, we could easily see this scenario play out well before Obama leaves office if we don’t quit punishing success.

There is a truism that states: “If you want more of a thing, you reward that thing. If you want less of a thing, you punish that thing.”

Obama’s agenda of punishing the thing that we need most, instead of rewarding it, is not going to produce any more revenue for the federal government. In fact, it will produce less revenue. By effectively punishing success and rewarding sloth, he is insuring that we will have less success and more sloth. That’s not to say that there will actually be less success. It just means that there will be less success in the USA. Successful people aren’t going to just stop being successful because Obama doesn’t like success. They will just continue to take their success and associated jobs to other, more success-friendly nations.

Not only do we lose a disproportionately large portion of our tax base when that happens, but we lose most of the jobs that those successful people had created in the USA before becoming expats. If they are responsible for 35% of the taxes, then it’s reasonable to assume that they are responsible for a similar percentage of US jobs. But to be really conservative in our calculations, let’s cut that number in half to 17.5% and do the math one more time.

If we lose just half of the top 10%, who pay 70% of the taxes, it means that we lose 35% of our personal income tax base.

That would result in a 53.8% tax increase for those who remain.

If, as we concluded, the half of that top 10% are who are leaving are responsible for 17.5% of jobs, then we’re looking at a 17.5% loss in US jobs.

That means that the remaining 82.5% of workers who still have a job would have to pick up not only the additional 50% tax increase to cover those successful expats, but all the taxes that used to be paid by the 17.5% who can no longer find work.

However, since half of Americans don’t pay any tax to begin with, it means that all of that lost tax revenue would have to be made up by just 41% of Americans – most of them earning less than $100,000 a year.

Under such conditions, we would have passed the point of no return. Our remaining income base would not be enough to pay down the debt, even if we raised taxes to 90% for everyone who remained and cut spending by 90% across the board.

As you can see, “Soak the Rich” completely falls apart when you look at its unintended consequences and do the math. Rather than punishing success and driving more successful people away, we should be creating incentives to reward successful people from other countries for coming here, doing business here, creating jobs here, and paying taxes here (and reward our own successful people for remaining here.)

Obama’s “Soak the Rich” agenda threatens to be more devastating to our economy than anything else he could do. After all, how could we possibly pay off the federal debt if we lose 30%, 40%, 50%, or more of our tax base?

It’s all the rage to talk about the “Fiscal Cliff”. Both Republicans and Democrats are talking about it and with good reason. It’s a serious issue.

But that fiscal cliff is closer than any of the politicians or pundits are telling us. They’re either missing or ignoring a critical set of facts – facts that point to a problem that could not only move us closer to that fiscal cliff, but multiply its already predicted disastrous effects. The problem of which I speak is that the people who will be expected to pay the taxes to keep us from going over that cliff are leaving in alarming and growing numbers.

Since Barack Obama took office, formal expatriations have spiked almost 8-fold, from a record low in 2008 to a record high in 2011. As part of the 1996 Health Insurance Portability and Accountability Act, the federal government has been required to publish in the Federal Register the names of every US citizen who formally renounces his US citizenship. A count of the names on those lists reveals that in 2008, only 231 US citizens renounced their citizenship. But in 2011, the number of expatriates reached 1,782. But those are just the very few people who “formally” renounced their citizenship.

For every citizen who formally expatriates, many more citizens just drop out, becoming informal expatriates. In fact, this informal expatriation has become so common that those who take this route have developed their own term for it. They call themselves “PTs”. The term “PT “is a catch-all term that has a variety of similar meanings, including “Practically Transparent”, “Privacy Trained”, “Prior Thrall”, and “Permanent Tourist”. It is the nature of these definitions that tell us that PTs tend to be somewhat secretive. Therefore, it’s very difficult to accurately measure their numbers.

But the respected polling firm Zogby International figured out how to do it. Count them before they leave. In 2008, Zogby published a press release, in which they reported the result of seven polls that they had recently concluded. In that press release, they stated:

1.6 million U.S. households had already determined to relocate abroad; an additional 1.8 million households were seriously considering such a move, while 7.7 million more were ‘somewhat seriously’ contemplating it.

Overall, Zogby determined that “by a modest estimate”, more then 3 million US Citizens a year are relocating offshore. But that’s not to suggest that all of those people will become permanent expats. In fact, historically, only a little more than half of US citizens who relocate their home to another country will never return. So that means that whether by intention or circumstance, about 1.5 million will become permanent expats. But keep in mind, that was in 2008 – the same year that official renunciations were at a record low.

The question that we have to ask is: “While formal expatriations have been skyrocketing for the last three years, what’s been happening to those informal expatriations?”

Unlike formal renunciations, we don’t have factual numbers on the increase in informal expatriations. But we do have a set of facts that should give us a pretty good idea of where those numbers are headed. Let’s look at those facts.

1) When Obama took office, he promised to soak the rich; and it’s one of his few promises that he’s really trying to keep. The rich see this as punishment for success.

2) Formal expatriations spiked the next year and have climbed sharply each year since.

3) Successful people are the ones who can best afford to live wherever they choose.

4) Successful people don’t let problems get in their way. If it becomes difficult to succeed in one place, they’ll simply go to a more success-friendly jurisdiction.

5) Nobody wants to be constantly told that they are bad people, especially successful people. But that’s what Obama is doing.

Based on these facts, it would be reasonable to assume that those who have both the motivation and the wherewithal to live somewhere else would at least give serious consideration to moving to a more success-friendly jurisdiction. Therefore, it’s quite likely that informal expatriations have been climbing, too.

However, since we don’t know exactly how much that rate is climbing, let’s ignore it for now and just use that 1.5 million number that we can confirm.

The reason why this issue is so crucial is because most of those people who are leaving are rich – the people who create the jobs and who pay the lion’s share of our taxes. They’re the investors, the risk-takers, and the producers. In other words, they’re the people who we can least afford to lose. Of course, many of you may be asking just how many of those people really are rich. But the better question is: “How many of those people do YOU think are poor?”

Having traveled abroad on business and having lived abroad for some time, I would say that, as a general rule, it would take either a minimum income of $100,000 a year or retirement assets from that level of income in order to be able to move offshore and maintain a somewhat similar quality of life to what the individual or family had here. As it turns out, the IRS reports that in 2009, the income floor to be in the top 10% of taxpayers was very close to that number, at $112,124. Now certainly, many people won’t consider that rich. But the important thing to consider about that group is that they’re the people who pay 70% of all federal personal income tax collected by the IRS.

So it’s reasonable to assume that the vast majority of those who are leaving are in that group of taxpayers who pay 70% of the personal income tax load. So, if just 90% of those who are leaving are in that top 10%, that’s 1.35 million expats a year, from the group that pays 70% of all federal personal income tax.

So why should we be worried about this? Well in 2009, there were 13.8 million taxpayers in that top 10%. If we’re losing just 1.35 million of those people every year, how long would it take to lose most of that top 10%? Do the math. If that rate remains steady, it would take about ten years. But it’s not staying steady. It’s climbing rapidly.

Do you begin to see how this will seriously shorten the time that it will take us to reach that fiscal cliff? If we were to lose just half of that top 10% of taxpayers, it would still mean a tax increase for the rest of us, in the range of more than 50%. If most of that top 10% were to leave, everyone else’s taxes would have to more than triple to make up the difference.

Of course, with fewer and fewer successful people left in the USA, there wouldn’t be enough taxable income left to pay down the debt… ever. The deficit and the debt would continue to rise until our creditors realize that we don’t have enough high-income taxpayers left who are capable of ever paying off that debt. With every successful taxpayer who leaves, that fiscal cliff gets closer. But instead of trying to keep our successful taxpayers here and encouraging more to locate here, Barack Obama’s “soak the rich” agenda is driving them off faster.

As more of the wealthy leave, the weight will fall heavier on those who remain, and more of them will decide to take the same step. This in turn will multiply the pressure on those who remain, and the cycle repeats.

“Soak the Rich” is not the solution. In fact, it’s a very big part of the problem.
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For more on this subject, read “The Rich Don’t Pay Tax! …Or Do They?” by John Gaver. It’s available in print, Kindle, and Nook formats through Amazon, Barnes and Noble, and other booksellers or at http://TheRichDontPayTax.com.